Cross-Border Bank Flows and Monetary Policy

Using the BIS Locational Banking Statistics data on bilateral bank claims from 1995 to 2014, we analyze the impact of monetary policy on cross-border bank flows. We find that monetary policy in the source countries is an... [ view full abstract ]

Using the BIS Locational Banking Statistics data on bilateral bank claims from 1995 to 2014, we analyze the impact of monetary policy on cross-border bank flows. We find that monetary policy in the source countries is an important determinant of cross-border bank flows. In addition, we find evidence in favor of a cross-border portfolio reallocation channel that works in parallel with the traditional bank lending channel. As tighter monetary con- ditions in source countries erode the net worth and collateral values of domestic borrowers, banks reallocate credit away from relatively risky domestic borrowers toward safer foreign counterparties. The cross-border reallocation of credit is more pronounced for banks in source countries with higher prevalence of household credit and weaker financial sectors. Also, the reallocation is directed especially toward
foreign non-bank borrowers in advanced economies, or those in economies with investment grade
sovereign rating. Thus, our study highlights the spillovers from domestic monetary policy on
foreign credit, enhancing the understanding of the international monetary transmission mechanism
through global
banks.